John Lefferts' Blog

Thursday, April 29, 2010

Overconfidence or Incompetence...assigning blame for the financial crisis

"The financial crisis was not caused by incompetence, but rather experts who were blinded by their overconfidence." I just returned from a financial industry conference in Washington DC and one of my favorite book writers, Malcolm Gladwell (loved "Blink" and "Outliers") spoke about his observation of the crisis with the typical nuanced and human behavior twists he is known for. He explained that mistakes of incompetence are usually no big deal as they seldom rise to the level of influence of an expert (we could argue this point about our elected officials!). It's when experts with supposedly all the information and knowledge possible develop a can't lose mentality. When this happens, the world can change around them, but the expert will never see it. Case in point, Jimmy Cayne, former CEO of Bear Stearns. He was found at a bridge players tournament without access to communication while his firm was crashing and burning. His world was being destroyed around him and he just didn't see it. Then, after the crash is assessed, he denies doing anything wrong, typical of an overconfident expert. You'd never say you crashed your car because you're a good driver would you? Same with Dick Fuld at Lehman and others who crashed and burned. It wasn't their expertise, but their human nature that allowed for their respective firms' demise.

I watched parts of the Senate hearings with Goldman Sachs and not only was it evident that Goldman cannot admit they were wrong (they're the experts...right?), but the Senators made it obvious they have no idea what's going on. So you have both Goldman expert overconfidence sparring with Senatorial incompetence, very entertaining...but not very productive. Politicians always seem to be focused on their rear view mirror looking for a villain to blame while the opportunity to effect positive change passes them by. Like Gladwell, I really don't think there is any singular entity or person to point the finger at for this crisis. Frankly, people at all levels had their hand in this deal. It was one big casino and Goldman was simply one of the more visible bookies among others who were placing bets on behalf of those for and against the deal while making some bucks on the vig. They even placed some of their own bets on the deal. The finger pointing, blaming and vilifying has run its course and is becoming destructive. But the government continues to look for the perpetrators (blaming Bush for everything has run its course) like a dog chasing its tail and looking very foolish in the process.

I'm not saying that Goldman is pristine as they would like us to believe. Similar to the other bookies in the business, they were simply doing what the system allowed them to do; make money for their clients and themselves even if it meant taking advantage of the system. But clearly, they weren't alone. Earlier in the decade, I knew a couple mortgage brokers in Southern California who were not only making money...but obscene money. I'm talking private jets, multiple high end vacation homes, etc. These were relatively unsophisticated folks who were basically just So Cal surfer dudes liv'in the life. I always thought it strange that guys like this could be knocking down the big bucks. Now I know. They were part of a chain of people from the high school drop-outs with no income flipping homes in So Cal all the way up (including the Government) to AIG's unregulated financial products division. They all believed they couldn't lose and after they did, each denies that they had a hand in it. They were all overconfident experts who couldn't see the world changing around them.

So as I'm prone to do, I'll end with a couple quotes:
" Two things are infinite: the universe and human stupidity; and I'm not sure about the universe"
         -Albert Einstein

"Nearly all men can stand adversity, but if you want to test a man's character, give him power"
          -Abraham Lincoln

Combine stupidity and power, and you have a prescription for disaster. If only those up and down the chain would fess up to their part in the crisis so we could get past these silly hearings and get on to the business of fixing our economy. But as much as we each intellectually know this, human nature trumps it all. Again, entertaining, but not terribly productive.


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